Central Bank publishes new Market-Based Finance Monitor

• The new publication will track developments in Ireland’s large and growing market-based finance sector in a systematic way.
• Market-based finance provides a valuable alternative to bank finance, supporting economic activity, but can also contribute to a build-up of financial vulnerabilities, which need to be monitored.
• With the sector in Ireland being largely internationally-focused, active and systematic monitoring of developments is a core element of the Central Bank’s approach to contributing to global financial stability.

The Central Bank has today (15 December) published the Market-Based Finance Monitor, a new publication which aims to monitor activities and balance sheet trends in the Irish market-based finance sector that could point to potential financial vulnerabilities.

This forms one element of the Central Bank’s broader priority to safeguard the resilience of this growing form of financial intermediation, including by contributing to international initiatives to enhance the regulatory framework for market-based finance and develop a macroprudential perspective in the regulation of the sector.

Market-based finance refers to the raising of debt or equity through financial markets, rather than through the banking system. The sector has grown rapidly in recent years and has become a central part of the international financial system.

The sector in Ireland is one of the largest internationally, with the main participants being investment funds, including money market funds (MMFs), and special purpose entities (SPEs). Total assets held by these entities currently stand at around €5.2 trillion.

Market-based finance provides a valuable alternative to bank finance, supporting economic activity. Like all sources of financial intermediation, though, market-based finance can also contribute to a build-up of financial vulnerabilities, which need to be monitored and – if needed - addressed. Potential sources of vulnerabilities include leverage, liquidity mismatches and interconnectedness with other parts of the financial system.

Notable trends over the past year highlighted in the first edition of the Monitor include:

• Rapid growth in the size of the sector has continued, especially in investment funds, largely due to a strong rise in valuations of financial assets globally, but also reflecting continued inflows into the sector.
• There has been some reduction in measured leverage within those investment fund segments that are most highly leveraged.
• There has been an improvement in the liquidity position of money market funds (MMFs) following the early COVID-19 market disruption, which has persisted. Among other investment funds, the share of liquid assets has remained broadly unchanged.
• There has been no marked change in the riskiness of investment funds’ fixed income exposures, despite the continued low interest rate environment.
• There has been continued growth in collateralised loan obligations (CLO) vehicles domiciled in Ireland, partly due to a relocation of some of these entities from the Netherlands.

Vasileios Madouros, Director of Financial Stability, said the new publication complements other non-bank monitoring reports to which the Central Bank already contributes, including the Global Monitoring Report on Non-Bank Financial Intermediation from the Financial Stability Board and the Non-Bank Financial Intermediation Monitor from the European Systemic Risk Board.

He added: “The global financial system has changed considerably over the past decade, with market-based finance having grown particularly rapidly. Ireland is now an international hub for such activities, with the non-bank sector here having large and complex links to the global economy and financial system. The growth in market-based finance offers a valuable alternative to bank financing, supporting economic growth. But it can also lead to a build-up of financial vulnerabilities that need to be monitored and – if needed – addressed. Systematic monitoring of developments of Ireland’s internationally-focused sector is a core element of the Central Bank’s approach to contributing to global financial stability.”